Energy is an important commodity in many economic activities. Its usage affects the environment via CO2 emissions and the Greenhouse Effect. Modeling the energy-economy-environment-trade linkages is an important objective in applied economic policy analysis. Previously, however, the modeling of these linkages in GTAP has been incomplete. This is because energy substitution, a key factor in this chain of linkages, is absent from the standard model specification. This technical paper remedies this deficiency by incorporating energy substitution into the standard GTAP model. It begins by first reviewing some of the existing approaches to this problem in contemporary CGE models. It then suggests an approach for GTAP which incorporates some of these desirable features of energy substitution. The approach is implemented as an extended version of the GTAP model called GTAP-E, which includes the standard GTAP model as a special case. In addition, GTAP-E incorporates carbon emissions from the combustion of fossil fuels and this revised version of GTAP-E provides for a mechanism to trade these emissions internationally. The resulting behavior of agents in the model is analyzed using general equilibrium demand elasticities which summarize the combined effect of the new model specification. Implications for policy analysis are demonstrated via a simple simulation experiment in which global carbon emissions are reduced via a carbon tax. Results show that incorporating energy substitution into GTAP is essential for conducting analysis of this problem. The policy relevance of GTAP-E in the context of the existing debate about climate change is illustrated by some simulations of the implementation of the Kyoto Protocol. It is hoped that the proposed model will be used by individuals in the GTAP network who may not be themselves energy modelers, but who require a better representation of the energy-economy linkages than is currently offered in the standard GTAP model.


Trade in energy, Trade and the environment, Calibration and estimation of CGE models

Date of this Version

January 2002